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Judge Louis A. Scarcella of the U.S. Bankruptcy Court for the Eastern District of
New York concluded Oct. 12 that creditor Josef Zloof failed to meet his burden of
proof under Bankruptcy Code Section 707(a) to dismiss the case.

Under Section 707(a), a Chapter 7 case may be dismissed for “cause,” but the Bankruptcy
Code doesn’t define the term “cause.” What constitutes “cause”
to dismiss is therefore left to the discretion of the court, the court said.

Bankruptcy courts disagree on whether “bad faith” may serve as “cause” for dismissal
under Section 707(a), the court said. Courts that allow bad faith to serve as cause
for dismissal have a “stringent standard” that is used in egregious cases where assets
are misrepresented or concealed or there are excessive expenditures and a lavish lifestyle,
the court said.

While the court was “sympathetic”
to the creditor’s plight that he wouldn’t receive any distribution in this “no-asset”
case, the court said it was “bound to apply the law as it exists.” The debtor’s misconduct
wasn’t stringent enough to meet the standard for finding bad faith under Section 707(a),
the court said.

Debtor Tolly Chovev, a dentist, filed for Chapter 7 bankruptcy protection after Zloof
obtained a $267,700 medical malpractice judgment against him in a New York state court.
In a Chapter 7 case, a debtor’s nonexempt assets are liquidated by a trustee and the
proceeds are distributed to creditors.

The debtor listed monthly income of $8,049, and $1,200 additional income from his
non-debtor spouse. He also listed household monthly expenses of $10,250, leaving a
$1,001 monthly deficit.

The debtor owned no real estate and only had unsecured priority debt of $52,658, and
unsecured non-priority debt of $318,753, including the malpractice judgment.

Zloof asked the bankruptcy court to dismiss the case under Section 707(a), arguing
that it was filed solely to stay collection efforts and avoid repayment of the malpractice
judgment. According to Zloof, this is evidence of “bad faith” warranting dismissal.
Zloof also said the debtor inflated his expenses, which is bad faith.

The debtor contended that his Chapter 7 case wasn’t filed in bad faith, and that the
majority of his debts are business debts.

Filing Chapter 7 to ward off collection efforts isn’t in and of itself sufficient
to establish cause under Section 707(a), the court concluded.

The court also rejected Zloof’s argument that the debtor used bankruptcy as a refuge
from having to pay the malpractice judgment and that he had sufficient resources to
repay the judgment. The ability to pay one’s debts can’t “serve as the principal basis
to dismiss a chapter 7 case for cause under §707(a),”
the court said, based on the legislative history to the section.

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